Published on
July 11, 2025
M&A Risks: Data Storage Compliance Issues
Mergers and acquisitions often expose companies to data storage compliance risks that can lead to penalties and breaches. Learn how to address these challenges.
Mergers and acquisitions (M&A) often expose companies to serious data storage compliance risks. These challenges can lead to regulatory penalties, data breaches, and financial losses if not addressed early. Here’s what you need to know:
- Regulatory Non-Compliance: Acquiring companies inherit all compliance obligations, including unresolved issues. Failing to meet standards like GDPR or HIPAA can result in hefty fines, as seen in Marriott’s £99 million penalty after acquiring Starwood Hotels.
- Data Protection Failures: Merging IT systems increases vulnerabilities. Poor encryption, weak access controls, and breaches during integration can cost millions, such as Spectrum Health’s post-merger data breach.
- Missing Documentation: Incomplete records can delay integration, inflate costs, and lead to disputes. Verizon reduced its Yahoo acquisition price by $350 million due to undisclosed breaches.
Key Solutions:
- Conduct comprehensive compliance audits immediately after signing a letter of intent (LOI).
- Use automated tools for real-time compliance monitoring and AI-powered data classification.
- Implement strong security measures like encryption, multi-factor authentication, and continuous monitoring.
Takeaway: Addressing these risks early protects deal value, reduces liabilities, and ensures smoother integration. Ignoring them can lead to financial and reputational damage, as high-profile cases have shown.
Main Data Storage Compliance Risks During M&A
Mid-market M&A transactions often bring significant data storage compliance challenges. These risks become even more pronounced during IT integration, where companies face three main threats: regulatory non-compliance, data protection failures, and missing documentation. Together, these issues create a perfect storm that can jeopardize the success of a merger or acquisition.
Regulatory Non-Compliance
Legacy systems and unresolved compliance problems can attract heightened regulatory scrutiny during M&A. When companies merge, they don’t get a compliance “timeout.” Instead, the acquiring company inherits the regulatory obligations of the target company.
"Compliance is not something that pauses just because you're integrating systems; all those rules–HIPAA, SOC 2, GDPR, CMMC, and others–still apply and compound when companies merge." - Meriplex
The stakes are high. Penalties for non-compliance can be severe, especially under laws like GDPR and CCPA. For example, GDPR enforcement has resulted in over 1,878 fines, totaling more than €4.4 billion as of October 2023.
A cautionary tale is Marriott’s 2016 acquisition of Starwood Hotels. Unbeknownst to Marriott, Starwood had been experiencing a data breach since 2014. This breach, which persisted into 2018, exposed the personal information of roughly 500 million guests. The UK’s Information Commissioner’s Office initially proposed a £99 million (about $123 million) fine under GDPR, citing Marriott’s failure to conduct thorough data protection due diligence.
This isn’t an isolated case. IBM’s 2023 Cost of a Data Breach Report found that companies undergoing major IT transitions, like those during M&A, are at a much higher risk of costly breaches. These regulatory challenges often pave the way for deeper data security concerns.
Data Protection Challenges
M&A transactions also amplify technical vulnerabilities, making data protection a critical concern. Poor encryption, weak access controls, and inadequate monitoring during data transfers can wreak havoc when integrating different IT systems.
The financial toll of these failures is staggering. A single data breach costs companies an average of $4.45 million, and the risks multiply during M&A. Additionally, 88% of data integration projects either fail or exceed their budgets due to poor data quality, highlighting the need for strong protection protocols.
Consider the 2018 merger of Spectrum Health and Lakeland Health. Post-merger, Spectrum Health discovered that Lakeland’s third-party medical billing service had suffered breaches, exposing the records of roughly 60,000 patients initially, followed by another 1,100 patients later. These breaches forced the merged entity to incur extra costs for identity protection services and patient notifications.
The risks are so significant that 26% of companies abandon at least half of their deals due to compliance issues uncovered during due diligence. Clearly, robust data protection measures are not optional - they’re essential.
Missing Documentation and Reporting
Beyond compliance and security, inadequate documentation can undermine the entire M&A process. Missing or incomplete records often lead to legal disputes, regulatory penalties, and delays in integration. Alarmingly, about 40% of companies fail to prioritize necessary internal controls during the M&A lifecycle, leaving documentation gaps that can surface later.
These gaps don’t just slow things down - they can inflate technical debt and obscure the true value of data assets. Without proper documentation, it’s nearly impossible to achieve accurate valuations, and financial setbacks often follow. Since 50% of business synergies depend on successful systems integration, solid documentation is a cornerstone of deal success.
"Optimized data management involves an early understanding of what happens to the data after a transaction. It implies having the ability to report on the data and respond to third parties like government officials, if needed. It also means having a coherent and well-understood framework, which organizations can tap to find evidence of what was received and divested." - Deloitte
A prime example is the Yahoo-Verizon acquisition. In 2017, Verizon reduced its original offer for Yahoo by $350 million after due diligence revealed two previously undisclosed data breaches. The lack of breach documentation not only slashed the deal’s value but also left Verizon sharing legal liability for the incidents.
Even after a deal closes, documentation gaps can create ongoing compliance risks. Discrepancies in business records can spark disputes between buyers and sellers, leading to long-term legal exposure.
Addressing these risks is critical to ensuring effective data storage practices during M&A.
New Technologies for Secure Data Storage and Compliance
The latest advancements in technology are reshaping how companies handle secure data storage during mergers and acquisitions (M&A). These tools not only safeguard sensitive information but also streamline compliance monitoring and data classification, which are critical during complex integration processes. By utilizing encryption, automation, and artificial intelligence (AI), organizations can tackle the compliance risks that often jeopardize deals.
Cloud-Based Encrypted Storage Solutions
Encryption has emerged as a powerful defense against data vulnerabilities during M&A. Cloud-based encryption ensures that data remains secure both while being transmitted and when stored. This addresses a major concern in M&A transactions: the risk of exposing sensitive information during system integrations.
One standout feature of encryption is its ability to detect alterations instantly, ensuring data integrity throughout the process. Moreover, encrypted data offers a legal advantage - companies may not need to disclose breaches if the compromised data was encrypted, helping to mitigate reputational damage and legal consequences.
"Encryption is one of the primary defenses organizations can take to secure their data, intellectual property (IP) and other sensitive information, as well as their customer's data. It also serves to address privacy and protection standards and regulations." - Cody Queen, Senior Product Marketing Manager, CrowdStrike
The widespread use of encryption underscores its importance. For instance, as of January 2024, 96% of pages in Chrome in the US are loaded over HTTPS, reflecting how encryption has become the norm in data protection. However, this also creates new challenges. According to Zscaler research, over 87% of cyberattacks now exploit encrypted channels, demonstrating how attackers adapt to security advancements.
Cloud encryption platforms offer unmatched scalability, a crucial feature during M&A activities when data volumes can spike dramatically. Unlike traditional on-premises systems, cloud solutions automatically adjust to handle increased loads without compromising security. This adaptability is particularly valuable when integrating companies with vastly different IT infrastructures.
Automated Compliance Monitoring Tools
Automated tools are transforming compliance management by providing real-time insights and flagging risks as they arise. These systems simplify compliance reporting and ensure adherence to regulations, even in complex scenarios.
AI-driven tools have proven to be game-changers for document reviews. For example, users of Document Intelligence report document retrieval and review speeds that are 50% faster than manual methods. Other tools, like ThoughtRiver and eBrevia, accelerate risk identification by 66% and up to 90%, respectively, compared to traditional methods.
These solutions offer a clear view of where sensitive data resides, who has access to it, and whether it’s adequately protected. During M&A, this visibility is critical for spotting compliance gaps that could derail a deal.
"RegScale's focus on continuous controls monitoring will become even more critical for organizations navigating increasingly complex regulatory requirements. RegScale's unique solution embeds the actual compliance checks into the digital workflows. This enables proactive management of regulatory obligations in near real time." - Kevin Magee, Global Director of Cybersecurity Startups at Microsoft
Real-time monitoring tools also provide immediate alerts for issues like data leaks or misconfigured security settings. This allows teams to address problems before they escalate into major compliance violations. For organizations operating across different regions, these tools can break down complex regulations into understandable terms and highlight what’s relevant to each location. By doing so, they prepare businesses for secure and seamless integration during M&A.
AI-Powered Data Classification
Artificial intelligence has revolutionized how companies identify and manage sensitive data during M&A transactions. By automating data classification, AI enhances protection, ensures privacy, and simplifies compliance without relying on manual input or constant system adjustments.
Modern AI systems, like Cyera’s, achieve 95% precision in identifying and labeling sensitive data. These tools scan across various platforms - cloud apps, emails, databases, and collaboration tools - automatically applying pre-mapped sensitivity labels. Unlike traditional methods, they don’t require custom regex or keyword setups.
"Data classification tells you how to treat it. Is it public? Internal? Confidential? Restricted? Classification assigns your data a business context and risk level so you can apply the right protection, retention, and sharing rules." - Zscaler
This technology addresses a major challenge in M&A due diligence. A 2020 survey revealed that 60% of respondents discovered cybersecurity issues post-deal, often leading to reduced deal valuations. AI-powered classification helps uncover these problems early, preventing costly surprises.
What sets AI apart is its ability to adapt to different environments. For instance, Cyera’s system dynamically learns from the data it encounters, identifying patterns across various geographies and languages. This capability is essential when merging companies with differing data practices and regulatory obligations.
How to Manage Data Storage Compliance in M&A
Managing data compliance during mergers and acquisitions (M&A) is all about tackling risks early. Companies that address these challenges upfront can avoid expensive setbacks and streamline the integration process. The key lies in a well-rounded approach that includes audits, thorough documentation, and robust security measures.
Run Complete Compliance Audits
Compliance audits are the backbone of secure M&A transactions. Once a letter of intent (LOI) is signed, acquirers should immediately begin these audits to uncover potential risks while there’s still time to address them.
For a thorough audit, assemble a team of experts from finance, legal, operations, and IT. This team should establish clear goals tailored to the specific deal and create a detailed checklist covering all critical areas.
Here’s a snapshot of key compliance areas to focus on:
| M&A Compliance Area | Key Audit Items |
|---|---|
| Data Security | CCPA, HIPAA, GLBA, GDPR certifications; SOC 1,2,3 audits; data inventory; breach history; security policies and systems |
| Intellectual Property | IP portfolios; USPTO records; licensing agreements; third-party IP rights; maintenance status; insurance coverage |
| Cross Border | Regulatory frameworks; corporate governance standards; foreign investment restrictions; data privacy laws |
Surprisingly, only 10% of companies perform detailed cyber due diligence, which often leads to costly surprises later. By proactively identifying issues, audits help prevent the kinds of setbacks seen in high-profile deals. For example, IT plays a crucial role as a safety net during mergers, ensuring accurate documentation, proper handling of data, and compliance with industry standards.
Standardize Data Documentation Processes
Consistent and clear data documentation is essential to avoid compliance gaps during M&A. Using automated, searchable catalogs of data assets can simplify this process dramatically.
Start by forming a joint data governance team with representatives from both organizations. This team should map out all data assets and systems, document existing privacy and security measures, and assign clear ownership and responsibilities for managing these assets.
A metadata control plane can help integrate different systems, making it easier to search, discover, and access data across the newly combined organization. Automating processes like access reviews and policy enforcement reduces errors and ensures consistency.
Standard naming conventions are also essential. For example, documents can follow a format like DocumentType_Date_Version, which helps teams quickly locate and verify information during due diligence and integration.
Additionally, defining data lineage, ownership rules, and escalation paths builds transparency and trust. These practices ensure data compliance is maintained throughout the transaction and beyond.
Use Advanced Security Measures
Once documentation is standardized, securing the data becomes the next priority. Establishing strong security protocols early in the M&A process protects sensitive information and ensures regulatory requirements are met. A survey found that 60% of respondents discovered cybersecurity issues at acquired companies post-deal, often leading to reduced valuations.
To safeguard data, implement measures like multi-factor authentication, encryption, and endpoint protection. Data security posture management (DSPM) solutions can provide visibility into sensitive data and highlight vulnerabilities before they escalate.
The consequences of neglecting security are clear. Take the Anthem-Cigna case: in 2015, Anthem’s $54 billion acquisition of Cigna fell apart after a massive data breach exposed the personal information of nearly 80 million people, raising serious questions about security practices.
Companies should conduct detailed audits to locate and protect sensitive data. This includes updating incident response plans to align with the acquiring company’s standards and involving experienced information security professionals throughout the process.
The Equifax data breach in 2017 serves as another cautionary tale. Personal information for 147 million people was exposed, leading to over $1.4 billion in security upgrades and legal costs. Investing in advanced security measures upfront is far less expensive than dealing with the fallout of a breach. Continuous monitoring, regular updates to security protocols, employee training, and routine audits are essential to maintaining compliance as the organization evolves post-merger.
sbb-itb-e766981
How Financial Advisory Services Help with M&A Compliance
Managing data storage compliance during mergers and acquisitions (M&A) can be a daunting task, especially for companies without specialized expertise. This is where financial advisory services step in, offering the technical know-how, regulatory insight, and strategic direction needed to sidestep costly compliance issues. By turning what could be a chaotic process into a structured and organized approach, these services help companies navigate the intricate web of compliance while aligning with broader regulatory measures.
Modern compliance regulations are so complex that even seasoned M&A teams may overlook critical vulnerabilities. Advisory firms bring a fresh set of eyes and a methodical approach to uncover and address these issues before they turn into deal-breakers or costly liabilities after the merger.
Reducing Compliance Risks
Financial advisors are skilled at pinpointing compliance risks that internal teams might miss. Their approach goes beyond basic checklists, tailoring risk assessments to the unique profile of the target company. This customized strategy ensures that potential issues are addressed early and effectively.
Engaging advisors early in the process is key to minimizing risks:
"However, compliance is too often engaged as an afterthought, late in the diligence process. Senior management should ensure that compliance is consulted early in the deal process and should carefully evaluate any compliance risks identified during diligence."
Firms like Phoenix Strategy Group use advanced tools and proprietary data to perform in-depth compliance assessments. Their data engineering expertise allows them to analyze complex data structures, identifying regulatory gaps that could lead to significant liabilities for the acquiring company.
The stakes are high when compliance risks are overlooked:
"Enforcement actions based on successor liability are quite common...Therefore, thorough compliance diligence is critical for avoiding successor liability that may significantly reduce the value of the deal and expose the new parent to financial and reputational harm."
Meeting Regulatory Requirements
Navigating the maze of federal, state, and international regulations during an M&A transaction is no small feat. Financial advisors play a vital role in aligning data systems with these regulations while ensuring the transaction process remains efficient.
Compliance technology plays a central role in this alignment:
"Compliance solution buyers are expanding beyond the Chief Risk Officer or Chief Compliance Officer. It's a company-wide effort, up and down the organization, to strategically manage the risk profile of a company's varied business units, functions, and projects."
Advisory firms assist companies in implementing governance, risk, and compliance (GRC) software. These tools provide real-time insights into compliance status and help spot potential issues before they escalate. For international transactions, advisors ensure compliance with regulations like GDPR by updating privacy policies, maintaining accurate records of processing activities, and validating data transfer mechanisms.
As compliance becomes a strategic priority, the importance of these tools continues to grow:
"Companies need compliance tools to manage and mitigate their risks. As risk management continues to grow as a strategic priority, these technologies will only become more important."
Aligning with regulatory requirements ensures a smoother transition and integration process, setting the stage for long-term success.
Simplifying Integration Processes
Financial advisors also play a crucial role in simplifying integration by standardizing data handling practices early in the process. They establish robust data governance frameworks that bridge the systems and processes of both the acquiring and target companies. By creating joint governance teams with clear roles and responsibilities, advisors ensure that all parties understand their compliance obligations during integration.
Phoenix Strategy Group’s integrated approach combines fractional CFO services, data engineering, and M&A advisory to streamline the integration process. Their expertise in financial planning and analysis (FP&A) ensures compliance requirements are built into the financial systems from the start, avoiding the need for costly adjustments later.
Advisors also help set up standardized naming conventions, document data lineage, and create escalation procedures to prevent compliance gaps. These proactive measures reduce the risk of regulatory violations and ensure that the merged organization operates efficiently from day one.
The compliance team’s role doesn’t end once the deal is closed:
"The compliance team is critical to avoiding unwittingly buying significant compliance liability, complying with foreign investment controls, and planning for compliant future interaction between the target and the new parent."
Managing Data Storage Compliance Risks in M&A
Navigating compliance risks during mergers and acquisitions (M&A) requires a proactive approach, especially when it comes to managing data storage. Ignoring these risks can lead to costly mistakes, as seen in high-profile cases like Marriott-Starwood and Verizon-Yahoo. In both instances, undetected data breaches resulted in multi-million-dollar fines and forced adjustments to the deals.
These examples highlight the critical need for early risk assessments. According to IBM's 2023 Cost of a Data Breach Report, companies undergoing major IT transitions - like those involved in M&A - are particularly vulnerable to breaches. At the same time, compliance requirements such as HIPAA, SOC 2, GDPR, and CMMC remain in full effect and often become even more complex when companies merge.
To effectively manage these risks, a solid plan must rest on three essential pillars: compliance audits, standardized data documentation, and strong security measures. During the integration phase, security becomes even more critical. Tools like encryption, SIEM systems, and intrusion detection solutions play a key role in safeguarding data, especially when IT systems are being overhauled and vulnerabilities are heightened.
This is where Phoenix Strategy Group’s expertise in data engineering and M&A advisory services can make a difference. By identifying regulatory gaps early, they help companies avoid potential liabilities that could derail the integration process. Embedding compliance into financial systems from the beginning also helps eliminate the costly corrections that often arise after a merger.
Even after the merger is complete, vigilance remains essential. Organizations must address any compliance gaps through remediation plans, update and unify their information security policies, and ensure that all employees are aware of and understand the changes. Ongoing audits during the post-merger phase are crucial for maintaining both the value of the deal and operational stability.
Ultimately, managing data storage compliance risks in M&A isn’t just about avoiding fines - it’s about protecting the value of the transaction and setting the stage for long-term success. Companies that prioritize compliance from the very start are better positioned for smoother integrations, lower costs, and stronger operations post-merger.
FAQs
What are the key data storage compliance risks during mergers and acquisitions, and how can they affect the transaction?
During mergers and acquisitions (M&A), data storage compliance risks can lead to significant challenges. These risks often include potential data breaches, non-compliance with regulations like GDPR or HIPAA, and complications from fragmented or siloed data systems. If left unaddressed, these issues can delay the transaction, inflate costs, and harm the reputations of the parties involved.
Addressing these risks requires careful due diligence and robust data security measures. By taking proactive steps to ensure compliance and simplify data integration, organizations can safeguard the deal's value while meeting regulatory and legal requirements throughout the process.
What are the best practices for addressing data protection challenges during IT system integration in mergers and acquisitions?
To tackle the challenges of protecting data during IT system integration in mergers and acquisitions, companies need to focus on data security and compliance. A good starting point is using data encryption to safeguard sensitive information during both transfer and storage.
Building a strong data governance framework is another key step. This ensures that all actions align with relevant regulations while reducing potential risks. Performing detailed security assessments can uncover vulnerabilities early, and restricting access to sensitive information to only authorized personnel helps minimize exposure.
Additionally, automating data retention policies and keeping systems under constant monitoring can strengthen security measures. By adopting these proactive strategies, businesses can protect vital information and make the IT integration process smoother during mergers and acquisitions.
How do financial advisory services help ensure compliance and reduce risks during mergers and acquisitions?
When it comes to mergers and acquisitions, financial advisory services play a crucial role in keeping everything above board and reducing risks. These professionals dive deep into due diligence, examining legal, regulatory, and financial aspects to spot any potential challenges that might otherwise go unnoticed. By reviewing financial records and compliance frameworks, they can pinpoint hidden liabilities and ensure all parties stick to the necessary industry regulations.
But their job doesn’t stop there. Beyond addressing immediate compliance concerns, they help businesses lay the groundwork for long-term strategies to avoid future complications. Their expertise helps companies manage complex regulatory landscapes, steer clear of costly fines, and transition more smoothly after the deal is closed.
